Random Market and Order Flow Thoughts

Bottom fishing is one of the most dangerous games you can play. It can be very dangerous if you lack knowledge about order flow, liquidity, news, sentiment, and global macro. Both traders and investors can fall victim to it.

The investor believes that a stock has gotten “cheap.” They see that it was trading 50%, 100%, 200% or higher just a few months ago, and think that if they can get in now, they can catch a nice reversal. They like to think about investing for the long term, therefore if they can get in now when it is “cheap” and hold it for a few years they can do well for themselves.

Only problem is that they haven’t figured out it doesn’t matter whether they think the stock is cheap. They did not ask the best trading questions. For the retail investor is not going to move the market. They need to rely on the order flow of other traders to move the price in their favor. If the other market participants do not think the stock is cheap and there are not enough limit bids to absorb the sell orders, the stock can keep on dropping, dropping and dropping…

Not even Warren Buffett can control the market.

Here is a chart of Bank of America:

Warren Buffett invested $5 Billion into Bank of America on August 25, 2011. The stock gaped higher as some shorts started scrambling to cover their positions. There were also many people that like to coattail Buffett. So those long traders wanted to buy into BAC since they think that Buffett “knows something.”

So they all went long.

For forex traders, think of it as a central bank intervention when the BoJ buys up billions of USD/JPY. What happens? USD/JPY goes up a few hundred pips, stalls out, then falls back down.

Similarly, Buffett bought $5 billion, the stock goes up a few dollars, stalls out, then falls back down.

What is wrong with all these people attempting to bottom fish and getting it wrong?

I will tell you the secret. It is about the fundamental/macro/global macro/sentiment order flow market participants capping the rallies.

Unless the market believes that Buffett is going to buy a few more billion and support prices, the market is going to defer to the order flow generated by fundamental, macro, global macro, sentiment and news related order flow.

Just like if the market knows that the Bank of Japan will not intervene, then the market will push USD/JPY lower. That is just what happens.

As Bank of America keeps dropping, all those traders and investors stuck long are feeling the pain as it keeps breaking support and making new lows.

Only question for them is, how much pain can they tolerate? Will they be able to hold through prices going down to $4, $3, $2, or even $1? Can they take that pain?

You may say, now Grkfx! BAC is not going to go down to $1.

I don’t know where BAC is going, the market will figure that out. All I know is that bottom fishing, done without order flow knowledge is a very dangerous game.

I remember a story of someone who was buying Citigroup shares starting from $15 back in 2008. Every time the stock kept dropping, he kept buying more. He was averaging down. Averaging down all the way to $5. He told me about all the hundreds of billions and trillions of assets that Citi had. I told him that you need to also look at their liabilities too.

Fast forward a few months later, Citigroup stock drops to below $1 a share. If the persons average price was $7.50 a share, the market value of his shares was down 80%. I don’t know whether he took the pain or held through the insane draw down.

The other problem is that even if the stock bounces back, how much will it bounce back? Citigroup was stuck below $5 for years. The person who’s average price of the shares was $7.50 is still down immensely years later.

Preservation of capital is key. If you don’t preserve your capital you can’t take advantage of tomorrows inefficiencies.

People bottom fish even in forex. All sorts of people attempting to bottom fish EUR/USD. Maybe even some order flow traders attempting to buy after a exotic barrier is broken. Depending on how they managed the trade, it may have been a profit or loss.

All sorts of people tried to pick a bottom in USD/JPY. Many of them got crushed.

Some people trying to pick a bottom in AUD/USD. They may like the carry trade. Many of them getting crushed.

There are many things I have learned over the years. One of the big ones, is that just when you think the market has bottomed out, the market loves to test your resolve. It loves to play games with you. It loves to make a few stabs lower and make a few breakouts lower. It can make false breakouts lower. The market loves to squeeze out the weak players in the market. Especially the players that are weak and do not have knowledge about order flow and liquidity.

Will some bottom fishing plays work out? Of course some will work out. The ones that do, always have order flow, news, and global macro reasons for them to succeed.

I don’t mind playing volatile markets. Completely fine with it as long as I know how to position size, risk control, and be on the right side of the order flow and liquidity.

The people who make the most money know about the fundamental, news, sentiment, global macro forces.

If you are an active trader and spend thousands of hours every year trading, then you should be on the fastlane, not the slowlane. Slowlane being attempting to extract an edge over a series of 100 trades. The fastlane is knowing that you can extract an edge, a massive edge within the next series of ten trades.

If you knew something was going to drop 30% within a few weeks, would you buy now or wait those few weeks? Those people who bought Bank of America above $8.00 are pondering those exact questions.

Bank of America just dropped another .08 cents from the time I added the chart to the time I finished writing this article. That is another 1.40% drop within the span of a few minutes.

Hey, there is always the chance it is a false breakout and it can be a great time to be buying.

After all, nothing wrong with bottom fishing if you have the order flow and liquidity on your side.

2 Responses to Random Market and Order Flow Thoughts

DaveOctober 15, 2011

Grkfx,
Could there be an alternative as to why BAC dropped?
I just have a hard time believing that Buffet and his team, with all the money in the world and insider knowledge, would make such a simple mistake of not understanding fundamental/macro/global macro/sentiment.
Don't you think their research would have considered practically everything under the Sun before making a $5 billion dollar bet?
How would retail traders like me, or a great order flow trader like you, with 10 times less information to work with, come out with better judgement than Buffet (for this particular trade)?